Seventeen percent of small to medium-sized businesses carry debt between $100,000 and $250,000. When you’re drowning in debt, finding a lifeline can feel overwhelming.
You may have heard about Chapter 13 bankruptcy and Chapter 11 bankruptcy as options. Yes, both offer a fresh start. You can get rid of your current debt and move on to another venture.
However, they work in different ways. Let’s break down Chapter 13 vs Chapter 11 so you know which choice would be right for you.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, sometimes called a wage earner’s plan, lets you keep your assets while you pay off all or part of your debts over time. This path suits people who have a regular income and can stick to a repayment plan. It’s often chosen for personal bankruptcy.
In Chapter 13 bankruptcy, your debts get reorganized, and you make monthly payments to a trustee. These payments then go to your creditors. This plan typically lasts three to five years.
Can Small Businesses Use Chapter 13?
Chapter 13 bankruptcy is not directly available to businesses. However, if you’re a sole proprietor, you’re in luck. Your business loans are personal debt because they’re in your name.
This chapter can work for you. You can protect essential business assets while repaying creditors over time.
Chapter 11 Bankruptcy
Unlike Chapter 13, Chapter 11 bankruptcy isn’t just for individuals; businesses can also file. It’s for debt reorganization.
Businesses can stay open and operate while repaying debts under court supervision. There’s no debt limit, so it’s an option for entities drowning in high amounts of debt.
Benefits for Small Business Owners
Filing for Chapter 11 bankruptcy can mean keeping your business alive during tough times. Your operation can continue, and an automatic stay of creditor action kicks in. This stay puts a pause on debt collection efforts, giving you breathing room to restructure and plan.
You might secure low-interest loans to keep things running, renegotiate leases and contracts, or pay off debts at lower amounts. Chapter 11 bankruptcy has become an attractive option for entrepreneurs striving to bring their businesses back to profitability.
Chapter 13 vs Chapter 11
Deciding between Chapter 13 and Chapter 11 bankruptcy comes down to your specific situation. For sole proprietors in cities like Tyler, focusing on credit repair in Tyler TX while considering Chapter 13 bankruptcy might be the step forward. But if you’re a business owner facing overwhelming debts, exploring Chapter 11 bankruptcy could provide the restructuring lifeline your business needs to survive.
What Is Voluntary Bankruptcy?
Voluntary bankruptcy occurs when an individual or business decides to file for bankruptcy because they can’t pay their debts. This action involves submitting a court petition that admits their financial situation is beyond repair.
The debtor usually initiates Chapter 11 or Chapter 13 bankruptcies. Still, involuntary bankruptcy is possible. Here, creditors force debtors into bankruptcy.
Avoiding Bankruptcy
The first step towards evading bankruptcy is to gain a clear understanding of your financial situation. List all your debts, including the amounts and the interest rates.
Similarly, summarize your income and monthly expenses to identify how much you can realistically allocate toward debt repayment. Sometimes, just organizing your finances can provide a clearer path forward.
Negotiate Your Bills
Many creditors are open to negotiation, especially if they believe it could increase their chances of recovering money. Ask about modifying your payment terms, lowering your interest rates, or settling for a lesser amount.
Combine Your Debts
Debt consolidation entails combining multiple debts into a single loan with a lower interest rate. This strategy can simplify your payments and reduce the amount you pay in interest. It’s crucial, however, to ensure that the new interest rate and payment terms genuinely offer relief and don’t extend your debt unnecessarily.
Recovering From Bankruptcy
Post-bankruptcy, you’ll receive mandatory debtor education. Don’t stop there. Take every opportunity to educate yourself on financial management.
Books, courses, and seminars can equip you with essential skills to prevent future financial distress. “Your Money or Your Life” by Vicki Robin and Joe Dominguez is a classic book that offers financial advice. You’ll learn the importance of aligning your spending with your values and finding financial independence.
Rebuilding Credit
Begin with a secured credit card where you deposit money upfront as a security. It’s a safe way to start demonstrating your creditworthiness.
Your payment history is one of the most impactful factors for your credit score. Consistent, on-time payments can improve your credit score.
Monitor Your Credit Score
Regularly check your credit reports for errors that could drag your score down. AnnualCreditReport.com is the official site where you can request your free credit reports from all three major credit reporting agencies. This includes Equifax, Experian, and TransUnion.
You can get one free report from each agency every 12 months. Dispute any inaccuracies you find. Over time, your on-time payments and debt management will start to improve your score.
Save and Invest
Once your debt is under control, shift your focus to saving. Even small amounts add up over time.
When ready, consider low-risk investments to boost your income. CDs, treasury securities, and ETFs are secure options to consider.
Certificates of Deposit (CDs) are savings accounts you set up with a bank for a fixed period. They give you a fixed rate of interest.
Treasury securities are like loans you give to the U.S. government. They come in different forms, such as bills, notes, and bonds.
Exchange-traded funds (ETFs) are collections of different investments that you can buy and sell. They follow the performance of a market index or group of assets.
Restore Your Financial Health
Dealing with debt can feel like a heavy burden. But knowing your choices, such as Chapter 13 vs Chapter 11 bankruptcies, offers a ray of hope.
Chapter 13 suits individuals who can pay back debt over time. Chapter 11 helps businesses needing a major overhaul.
It’s important to see bankruptcy as the last option. There are other ways to dodge it, like negotiating with your creditors and combining your debts into one.
After overcoming bankruptcy, focus on rebuilding your credit and monitoring your score. Check out our blog for more advice on growing your business and finances.
